U.S. Rule Would Force Banks to Identify Shell-Company Owners

The U.S. government is moving closer to bringing the owners of shell companies out of the shadows.

The White House's Office of Management and Budget earlier this week accepted for final review a rule that would force banks to identify the owners of companies behind shadowy financial transactions, such as the firms revealed in the Panama Papers scandal or the ones used to buy real estate. It would close a loophole that critics say allows criminal money into the U.S. financial system.

The OMB review is the last step before a rule becomes final.

U.S. anti-money laundering rules already require financial institutions to "know your customer" before opening an account for them, encouraging a risk-based approach for determining the level of knowledge needed on a client. Under a risk-based approach, certain clients receive more scrutiny than others, with politically exposed people, known colloquially as PEPs, to face a deeper look before opening an account.

But the existing rules don't require financial institutions to learn the true owner of a corporate entity, which critics have long said encourages corrupt officials across the globe to create shell companies to stash their funds in the U.S. financial system for safekeeping.

The rule, proposed in 2014 by the U.S. Department of Treasury's Financial Crimes Enforcement Network, represents a “significant enhancement” to requirements mandated under the Bank Secrecy Act, Treasury said at the time. OMB has up to 90 days to review the rule.

A spokesman for FinCEN said the agency couldn't provide specifics on the contents of any final rule, nor could he predict the timing for publishing a final rule. He declined to comment further.

Movement on the rule, which was first discussed in 2012, comes amid global scrutiny over the use of shell companies to hide assets, as was revealed earlier this month in the Panama Papers scandal. The scandal stems from a leak of 2.6 terabytes of data from Panamanian law firm Mossack Fonseca, which specialized in creating offshore shell companies. The leak spurred investigations across the globe into whether companies created by the firm for its clients were used for illicit purposes.

Under the 2014 proposal from FinCEN, a financial institution would require the person opening an account to fill out a form identifying themselves, the legal entity for which the person is opening the account and any beneficial owners associated with the legal entity. The proposal defined “beneficial owner” as any individual who owns 25% or more of the equity interest in the legal entity, or an individual with “significant responsibility” to control the entity. The person opening the account would furnish on the form a beneficial owner’s name, address, date of birth and social security or passport number.

However, since the proposal's release, it's come under criticism. Activists clashed with banks in comments to FinCEN, with one side saying the proposal was too strong and the other saying it wasn't strong enough. The International Monetary Fund weighed in as well, criticizing the U.S. in July 2015 for failing to move quickly enough on identifying beneficial owners, saying the rule, as proposed, was too weak.

"There were no requirements for [financial institutions] to look beyond a customer to establish the identity of the beneficial owners in all cases," the IMF said at the time.

Josh Drobnyk, a Treasury spokesman, wrote earlier this week in a blog post that finalizing the FinCEN customer due-diligence rule is part of a larger strategy to address national money-laundering risks. That strategy, he wrote, also includes pushing Congress to pass legislation that would mandate companies to disclose beneficial ownership information at the time of incorporation, force them to keep the information up to date and to penalize those that fail to comply.

"The misuse of legal entities to obscure beneficial ownership is a significant weakness in an otherwise strong and resilient U.S. financial system, and it can only be resolved with meaningful congressional action," wrote Mr. Drobnyk.

Write to Samuel Rubenfeld at Samuel.Rubenfeld@wsj.com. Follow him on Twitter @srubenfeld.